The Taxing Business of Raising Revenue

Complexities of taxation are well known and so is the importance of revenue raised through taxes. Compliance with the requirements for paying taxes can be a time-consuming nightmare, but there are middlemen who relieve businesses of the stress and make the payments for a commission. DAWIT ENDESHAW, FORTUNE STAFF WRITER and a taxpayer himself, explores what is involved in the payment and collection of taxes, finds out why late payments with penalties are often preferred and how E-tax can ease the procedural burden.

Taxpayers waiting for service in a Customs office at ERCA’s headquarters; some are also seen checking their files before they get their turn.

Desperate payers returning from a lunch break create congestion around the cashier's window, waiting for it to be opened.

For Tiruwork Seyoum and her friends who work at the cafeteria of the eastern branch of the Ethiopian Revenues & Customs Authority (ERCA), the last week of October and first week of November come with a deluge of customers, hence income. Her seasonal customers are mainly last minute taxpayers, who usually spend the whole day on the premises. They come to have lunch, during the break, have coffee and find a place to sit after long hours of standing in a queue, and moving around from one window to another.

“This is one of those seasons where we make a good sales,” said Tiruwork on November 4, 2015.

“We use one kilo of coffee a day on a regular basis and on such seasons, we add half a kilo more,” Tirework said.

This season is the time when last minute payers come to settle their taxes, having let the four-month payment time pass.

ERCA has separate schedules to serve taxpayers in the A to C categories: Category C from July 8 to August 6, Category B from August 7 to September 11/12, and Category A from July 8 to November 10. They come every month to pay value added tax and yearly for the annual income tax.

Tiruwork hears these taxpayers saying that they prefer to come late because they want to use the money until the last minute. A commissioned middleman paying taxes for private companies, agrees with her but adds more reasons, related to attitudes of the taxpayers themselves as well as the service providers.

“Sometimes it is a paradox that when I manage to find customers who prefer to pay early as per the schedule, the system/network is not usually fully functional, processes are slow and you might as well not find people on their desks,” he stated.

He is speaking from the experience of seven years on the job, and that experience has led him to the conclusion that it is better to go later, with just a few weeks to the deadlines, than earlier. His earlier practice of coming well in advance, put him in an uncomfortable situation with his customers, who expect him to finish the process much faster.

“Given the problem, sometimes I do pass the deadline and decide to pay with penalties, but even this may take up to two weeks,” he said.

Taxpayers visiting ERCA are either declaring loss, zero profit, or profits, said Ephrem Mekonnen, director of Education & Communications at the Authority. Those reporting loss and zero profits could come earlier, he argued, not wait as long as those who report profits, whose reason for delay is their need of the cash.

A common problem middel man encounters with his clients is related to filling in their information on the required documents. Some of them mix up days in their monthly VAT reports. They also confuse tax identification numbers (TIN) of buyers and sellers in their vouchers.

A taxpayer Fortune met at Eastern Branch complaining about the system.” saying, “It is because of the financial shortage that the company is forced to pay late,”

An accountant who works mostly with Plcs and large taxpayers, also added shortage of liquid cash and proper cash management as further reasons for late payment. Businesses make most of their biggest transactions on credit, because of which they struggle to get the cash for tax, he explained. Mostly large taxpayers fail to pay on time because of the large amount of tax they have to pay and because of the managerial complexities involved in their multiple businesses. These businesses are not only late to pay their taxes, but also to send their documents to this accountant’s firm for auditing.

These are part and parcel of tax practices that determine taxpayers’ compliance with the system. For Tadesse Lencho (PhD) tax expert and lecturer at Addis Abeba University, who has carried out extensive research in the area, compliance is regressive, getting worse for those who pay higher taxes.

The first thing to bring compliance with the tax system is that the payment system needs to be simplified.

“Taxpayers should not wait in long lines just to pay tax,” he said.

There are gaps in both practice and the legal framework of tax administration, according to Tadesse. Legal framework gaps include tax assessment, ambiguity of the law, as well as some elements that are out of context, such as the taxpayers’ categorisation, which does not consider inflation.

There should be incentives for early payers comers, or else why should they comply, ponders Tadesse. A simpler filing system is also in order, he argued, commending the draft Tax Bill, still in process, for proposing introduction of agent offices dedicated to filing tax documents.

As far as declaring loss and profit is concerned, the Authority has been urging large taxpayers to make these declarations online, with middle level taxpayers to come on board later this year. Even though the number of large taxpayers is minimal, only 1,003, ERCA estimates from 50pc up to 60pc of large taxpayers are using the system to declare the state of their businesses for taxation.

Berhanu Mamo, Information Technology Management director at ERCA declined to give further information on the current progress of the E-tax system, but Ephrem, said the system is now being expanded to accommodate middle taxpayers.

“We have a forum with taxpayers every three months; we always educate them on how to use the system,” Ephrem said.

ERCA had first introduced e-filing in 2006, which taxpayers can access through www.etax.gov.et.

The World Bank Group in its report in 2015 ranks Ethiopia 112nd in tax payment; the rank was made in accordance to points in total tax rates, time to comply and tax payment. The report shows that it takes 306 hours in Ethiopia to comply with all tax types, including corporate, labour and consumption taxes, which is far higher than the 202 hours in Kenya and 216 hours in Eritrea for the same purpose.

“If the cost of compliance is high, people will be discouraged,” Tadesse underlined. Prosecution does not bring compliance and the very purpose of the tax system is to generate revenue not to prosecute, he added.

For the 2014/15 fiscal year, the Authority has collected 83 billion Br, 65pc of total tax, from both Customs duty and other taxes from the large taxpayers – a 13 billion Br increment from the performance of the previous year. Of the total collected revenue, 53 billion Br was collected from Licensed Tax Preparer (LTP) offices from domestic tax alone. The Authority has planned to raise this sum to 59 billion Br by the end of the current fiscal year.